Wall St Week Ahead: Rising US megacap stocks have some wondering when to cash out

NEW YORK, June 2 (Reuters) – As the U.S. stock market continues to rise, investors who own shares in the huge technology and growth companies leading the charge are debating whether to cash out or keep riding.

A record $8.5 billion poured into technology stocks in the past week, data from BofA Global Research showed, as investors joined a rally that has seen the tech-heavy Nasdaq 1[ads1]00 (.NDX) up 33% in 2023. The benchmark S&P 500 ( .SPX) has risen 11.5% this year and is at a 10-month high.

Still others see reasons for caution. Among them is the tightness of the market’s rally: the five largest stocks in the S&P 500 have a combined weight of 24.7% in the index, a record high dating back to 1972, Ned Davis Research said in a recent report. The heavy weightings could mean more significant fallout for broader markets if these names falter.

“We had this big run-up, and the essential question is, do you think it’s going to continue, or do you think things are going to go back to normal?” said Peter Tuz, president of Chase Investment Counsel.

Excitement over advances in artificial intelligence is a key factor fueling gains in megacap stocks. Big movers include shares of Nvidia ( NVDA.O ), which is up around 170% this year, while Apple ( AAPL.O ) and Microsoft ( MSFT.O ), the top two U.S. companies by market capitalization, have both climbed nearly 40% .

Jay Hatfield, CEO of hedge fund InfraCap, believes excitement over AI will continue to boost megacap stocks. He overweights megacaps, including Nvidia, Microsoft and Google parent Alphabet ( GOOGL.O ).

“We believe 100% in the AI ​​boom,” Hatfield said. “I would be shocked if these stocks aren’t significantly higher by the end of the year.”

Data on Friday showed that US job growth accelerated in May, although a jump in the unemployment rate suggested that labor market conditions were easing, boosting investors’ appetite for stocks amid hopes that the Federal Reserve will be able to bring down inflation without damage the growth. The S&P 500 rose 1.45 percent.

Megacap stocks led the markets for much of the decade after the financial crisis, and betting against them has been a dangerous strategy in 2023. Investors’ allocation to cash is higher than it has been historically, data from BofA showed, which some market watchers believe is providing plenty of fuel to push the rally further.

Strong momentum may also continue to drive shares higher.

Michael Purves, CEO of Tallbacken Capital Advisors, wrote earlier this week that technical analysis showed the Nasdaq 100 is overbought, a condition that can make an asset more vulnerable to sharp declines. However, the index managed to gain another 10% over three months when it reached the same state two years ago, according to Purves.

The recent surge in Nvidia showed how a stock can continue to climb even after posting big gains. Shares were already up 109% heading into the May 24 earnings report, but rose another 30% in the past week following the chipmaker’s surprisingly positive sales forecast.

Kevin Mahn, chief investment officer at Hennion & Walsh Asset Management, said shares of Nvidia, which now trade at 44 times forward earnings estimates, according to Refinitiv Datastream, have gotten “a little rich.”

“I still like the technology sector over the next two years, but I now have to be much more focused on valuation given the rise in many of these megacap stocks,” said Mahn, who says Microsoft shares remain attractive in part because of the company’s impressive cash flow and healthy dividend yield.

Others remain wary, citing factors such as rising valuations and signs that the rest of the market is cycling away while a small cluster of stocks rise.

The performance of just seven stocks, Apple, Microsoft, Alphabet, Amazon ( AMZN.O ), Nvdia, Meta Platforms ( META.O ) and Tesla ( TSLA.O ), accounted for the entire S&P 500’s total return in 2023 through May, according to S&P Dow The Jones Indices.

Meanwhile, only 20.3% of S&P 500 stocks have outperformed the index on a rolling three-month basis, a record low going back five decades, according to Ned Davis. Levels below 30% have preceded weaker performance for the broader market, with the S&P 500 rising 4.4% over the next year against an average of 8.2% for all one-year periods, the firm’s research showed.

David Kotok, chief investment officer at Cumberland Advisors, has reduced his holdings of the iShares semiconductor ETF ( SOXX.O ) in recent days following the recent surge in Nvidia shares.

Kotok sees the narrowing of the breadth as an ominous sign for the broader stock market, saying stocks also look less favorable at certain valuations.

In a common valuation metric, the S&P 500 is trading at 18.5 times forward earnings estimates, compared with its historical average of 15.6 times, according to Refinitiv Datastream.

“You can have (market) concentration and it can go on for a while,” he said. But, he said, “to me, the narrowing is a warning.”

Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili, Nick Zieminski and Diane Craft

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